Books of Account in an enterprise: Monday reflections on selected problems of our time...

Piotr STASZKIEWICZ
Audit Partner w RSM Poland

It has been a while since my last post on the principles of accounting, and yet, over this long time I have had a number of discussions about my last blog article that helped me collect so many responses and concerns from my readers that I can now revisit the issues I discussed back then, this time from a slightly different perspective.

What we do not know about books of account?

Among issues that require clarification, the most recurrent ones were those about criminal sanctions, i.e. entrepreneurs who contacted us wanted to know what penalties they may face if they do not have an accounting policy in place or do not keep their accounts in accordance with the Accounting Act. At RSM Poland, we have also noted that there are more and more enquiries and concerns about the possibility of keeping the books outside Poland, often in a foreign language. Our experts are being asked for a professional opinion also during their everyday audit work, primarily by representatives of parent companies from the United Kingdom, the US or the Netherlands who need clarification on how to implement group accounting principles (group accounting), very often in their newly established  subsidiary in Poland. I will try to answer this question, along with some more.

Financial reporting not just once in a blue moon

Firstly, I am in favour of treating books of account as an element of the organisation that is useful on a daily basis. If you take bookkeeping activities seriously, it will help your financial and accounting services, as they will produce quality financial reporting with their pens (or more literally: their computer mice). What for? – you could ask. Is this not art for art’s sake? Even though you may consider it my professional bias, I am going to defend a position that well kept books of account give a reliable picture of what is there in your financial reporting; good accounting principles defined at the very beginning of your business operations mean more effective work of the accountants and easier preparation of work flows or reports for tax purposes.

A good accounting system, which translates into reliably kept books of account, increases the security of the company’s management and reduces the risk of any potential errors and suggestions for corrections made by auditors. Therefore, the proper maintenance of books of account is not only supposed to protect persons responsible for the entity’s management against the implications of provisions of Article 77 of the Accounting Act[1] (hereinafter: the AA), but also provide added value to the organisation. And if this is the case, it seems worthwhile to consider whether books of account can be kept in a way that will make it easier to record your business operations. This is connected with an inflow of questions about keeping the books in a foreign language, foreign currency or outside Poland. Not only the AA, but also the Position of the Accounting Standards Committee (hereinafter: Position of ASC) will be helpful here.

Accounts in a foreign language

When it comes to bookkeeping outside Poland, let us start from the fact that, even though the books are kept by the entity, the entity may, by law, delegate this obligation to:

• businesses providing bookkeeping services pursuant to the AA, Art. 76a sec. 3 or
• businesses from another Member State providing such services and defined under the Act on the rules of participation of foreign entrepreneurs and other foreign persons in trade in the territory of the Republic of Poland[2], i.e. entrepreneurs from an EU Member State or a member state of the European Free Trade Association (EFTA) other than Poland.

If the books are to be kept away from the entity’s registered office or the place of management, the head of the entity must, in short:

• notify the competent tax office of the location of books of account;
• ensure that books of account are available to external inspection bodies.

According to the above principles, there are no contraindications to keeping your books of account outside Poland, provided that the related activities are performed in an EU or EFTA country. However, as it is often the case in practice, there is a question whether other statutory requirements can be met if you opt for such a solution. For example, under Article 9 of the AA, books of account shall be kept in Polish. Unfortunately, however you want to approach it, our language is not the easiest one, so it is very often the case that external companies providing bookkeeping services use English to record business transactions in books of account.

What should be noted at this point is the Position of the ASC, indicating that the mere input of any accounting document data to the financial and accounting system is not equivalent to bookkeeping, as long as it does not directly involve:

• deciding on how to recognise this document in books of account;
• controlling the correctness of records of events made in the books .

Thus, the final qualification of the record and control over it would mean that this bookkeeping requirement is met. Would this mean that the record itself, e.g. in English, would be exempt from the bookkeeping rules, provided that the aforementioned two conditions are met anyway? I would be rather sceptical about making such an assumption, all the more so given that elsewhere in the Position of the ASC we can read that certain data, such as: names of entries, descriptions of both the types of transactions and posting orders, names of economic operations and contents of reports overlapping with the information included in books of account (journal, entries of general and auxiliary ledgers, trial balance, inventory), constitute a minimum requirement for books of account and must be made in Polish. However, it is worth to consider certain simplifications; for example, in the case of a significant number of transactions, you can locally use abbreviations or codes already used by foreign entities of the group. Clearly, as long as such a list of abbreviations, symbols or codes is implemented locally and expressed in Polish and attached to the books.

Is PLN a must?

As regards the currency that is supposed to appear in books of account, Article 9 of the AA clearly states that it shall be PLN. However, nothing prevents financial statements from using currencies of other countries: in accordance with the interpretation of the Ministry of Finance[3], entities that apply IFRS can use a presentation currency other than PLN. However, this does not change the fact that books must be kept in the Polish currency (and not the reporting or functional currency).

Books of account in a global perspective

The solutions presented above surely do not trigger optimism in entities operating internationally, because it is very often the case that global decisions they make are aimed at centralising certain activities and outsourcing them from controlled companies directly to a single external provider of outsourcing services, e.g. in the field of payroll or accounting and bookkeeping.

In this situation, companies operating in many countries at the same time need to consider what is the difference between, e.g. making accounting entries physically e.g. in India, but on a server and in the system of a local (Polish) company, and the scenario where an external company performs accounting only on their Indian servers and in their own system (i.e. if this third party, and not their Polish client, has sole control over books of account). What is more, there is still the requirement concerning the language of bookkeeping, as I have already mentioned. For this reason, it is becoming increasingly common for external bookkeeping service providers to have representatives in Poland who speak Polish. There is no doubt that the situation in this specific field of accounting is dynamic and the upcoming years may bring many changes in terms of transferring the bookkeeping (reporting) obligations to external and foreign providers by Polish businesses.

Single accounting system

Another issue arising in the time of restructuring or business combinations is the post-merger single accounting; quite often, the acquiree that has been formally deregistered after the merger continues to operate as a branch or a separate entity generating cash flows and documenting them on their “old” accounting system. Is this allowed by law? Pursuant to the AA, a going concern must keep books of account and shall have one journal where entries must be made in chronological order; the law does not mention two general journals (one for the acquiree, and the other for the acquirer). Auxiliary (partial) journals are allowed, yet only for specific types of transactions: they could be used separately for expenses, cash transactions or settlements, while it is difficult to imagine two partial journals for operations of the same type, e.g. sales transactions.

Summary

Leaving these inconveniences for businesses aside, I want to wrap up discussing the implementation of group accounting: it is not uncommon for group policies to be implemented and applied in a subsidiary, i.e. locally. This situation is a bit like the case of transfer pricing documentation: while providing advisory and outsourcing services at RSM Poland, we often hear assurances from the managements of Polish entities that a given company has transfer pricing documentation; however, after a close look it turns out that this documentation is not in the possession of the Polish branch (subsidiary), but only a foreign parent company seated e.g. in Germany. To make matters worse, this documentation often fails to meet the requirements set forth in the Polish tax regulations. You can easily guess the consequences: it is very often the case that the Polish tax authorities challenge such “group” documentation, the reason being that it does not comply with the Polish regulations.

Is it the same with group accounting principles? Fortunately, it is not. Owing to the amendments of the AA, we may say that we are now closer to developed countries, where the market system has been in place much longer than in Poland and the accounting policies have been applied for much longer. All the amendments of the AA that were gradually introduced since 2002 kept bringing us closer to broadly defined international standards; however, as can be seen from the examples above, there are still some regulations in place that could be at least re-discussed or updated. When comparing group accounting policies of multinationals from the US, Canada, the United Kingdom, Germany or the Netherlands with those in place in their subsidiaries in Poland, there will always be differences, even though, as we should note, these are quite often the result of inappropriate accounting policy or tax law rules implemented to the accounting policy in a given entity.

Tried and tested solutions

In other words, in order to achieve the best results, the books of account should be kept on the basis of an accounting policy defined on the basis of your business model, and periodically updated. At RSM Poland we succeed in this when providing our advisory services: we adjust the accounting principles to the business profile so that there are no discrepancies between the statutory statements and e.g. consolidation or management package.

I believe that my reflections will become a starting point for some new questions and discussions, later turning into our blog posts, in which our experts will provide a fresh and insightful perspective on these issues.

Clearly, as always we encourage you to contact RSM Poland experts directly.